insurance litigation

An insurance company may waive its right to deny benefits when it accepts premiums for coverage that its policy did not actually provide. It may also waive its right to deny benefits where, even for a short period of time, it provides the very benefits it later seeks to deny and discontinue.

In O’Connor v. Provident Life & Acc. Co. (E.D. Mich. 2006), an employee received, through his employer, a life insurance policy covering his life with a death benefit of $273,000. After the insured employee died, the insurance company declined to pay $273,000 to the insured’s beneficiary. Under the terms of the policy, the insured was only eligible to receive basic and optional coverage of up to five times his annual salary. Because his salary rounded up to $24,000, he was eligible for a maximum death benefit of no more than $120,000.

Two years before the insured passed away, however, he filled out an enrollment form in which he opted for $250,000 in supplemental coverage, plus a core benefit equal to his annual salary, adding up to a total death benefit of $273,000. Importantly, the enrollment form the insured completed stated that premiums would not be deducted from his paycheck unless the coverage was approved. Nevertheless, the insured’s employer deducted premiums from his paycheck based on the $273,000 death benefit he elected to receive, even though he wasn’t eligible to receive it. As a result, the insured had no reason to believe that he did not qualify for the full amount of the benefit he selected.

As a general rule in Tennessee life insurance policy cases, a beneficiary named in a life insurance policy does not have a vested interest in the policy’s proceeds when the person whose life is insured dies. If the owner of the policy retained the right to change the beneficiary, which is almost always the case, he or she can do so. Absent fraud, undue influence or lack of mental capacity, an owner can change the beneficiary of the life insurance policy any time before his or her death.

There is one notable exception to the above general rule which comes up sometimes in Tennessee life insurance policy cases. When someone is ordered to name a spouse, or his or her children, as beneficiaries of a life insurance policy as part of a divorce decree, then, any change that person makes before his or her death which contravenes the divorce decree may well be ineffective.

In Holt v. Holt (Tenn. 1999), the divorce decree required the Ex-Husband to acquire a $100,000 life insurance policy and to name his son (“Son”) as beneficiary. The Ex-Husband, however, did not comply with the terms of the divorce decree. Instead, he purchased two policies: a $50,000 policy, for which he designated his mother (“Mother”) as beneficiary; and, a $40,000, policy for which he designated Son as beneficiary. So, Ex-Husband under insured Son by $60,000.

The Ex-Husband passed away, and the Ex-Wife, looking out for Son, sought enforcement of the divorce decree. When Ex-Wife and Son sued, they named Mother as a defendant to the lawsuit on the grounds that the $50,000 of life insurance proceeds for which she was the designated beneficiary should be paid to Son.

Mother died after Ex-Wife and Son brought suit. The administrator of her estate was substituted in her place and argued that the Ex-Wife and Son were not entitled to the proceeds of the $50,000 policy. She argued that their only remedy was to obtain it from the assets of Ex-Husband’s estate, which did not include the life insurance policy benefits of the policy payable to Mother.

Articles Tagged with insurance litigation

Waiver by Insurance Companies Resulting from Acceptance of Premium Payments and/or the Providing of Benefits

Life Insurance and Divorce: The Rights of Legally Mandated Beneficiaries, Part 1